Sunday, January 10, 2016

What’s the Recent Labor Market History?

This graphic is an interesting way to summarize how labor markets have done over the last 15 years:

WSJ 16-01-11 Employment Charts

Unfortunately, like a lot of infographics that emphasize cool over utility, there are som pitfalls. In particular, people are predisposed to thinking higher is better, and the yellow and red ribbon shows a decidedly mixed message if that’s what you’re inclined to think. But … maybe not.

In principle, what you’re seeing here is a cool idea. Take the numbers from each year, and rank them from best (at the top), to worst (at the bottom). Then put a number of series side-by-side, to increase data density. Lastly, tie it all together by highlighting the current year (although doing that in warning colors of bright yellow and red is … problematic).

On the left, the job gain numbers are pretty good. They should be adjusted for the fact that the population is a little larger today than it was in the earlier years. This would tend to move the more recent years down a bit. Also, this is job gains relative to the year before. It’s really easy to gain jobs when the economy is coming out of a deep hole, so putting the recent years above those from a decade ago (when we were expanding out of a much milder recession that created less slack) may not be appropriate.

Second from the left is the unemployment rate. The number we have right now is pretty good, and we should feel good about that. Having said that, we’re too quick to forget that Bush beat the current number twice.

That panel should be compared with the one that is second from the right (the fact that they are not right next to each other is a tip off that what you’re seeing here is a victory of artistry over relevance). Anyway, this panel shows that for those people in prime working age, we don’t have as much participation as we used to. (Also note that there are some typos in the dates on this figure: 2005-08 are mislabeled and mixed in with the 2002-03 numbers). Also, we hear some stuff (correctly) that labor force participation is down because baby boomers are retiring: that is correct, but that’s not what’s shown here. Instead, this is something called the labor force to population ratio. How is that unemployment and that ratio are down at the same time? It’s telling us that some people aren’t that interested in working (note that there is no moral judgement there about whether that’s a good thing or not). The way to think about those two numbers is that of the population that should be working, about 80% of them want to work, and of that 80%, about 5% of those are unemployed. But given that the 80% figure is off a couple of points from where it has been, it means that the unemployment rate would be higher if those people were more interested in working.

In the middle is real GDP growth, and the story here is not so good. Only the growth in 2003 (at the very top) is “strong” for the U.S.

Lastly, I’ll discuss the panels on wage growth and inflation. There are two pitfalls here. First, they should be next to each other so we can compare them. Secondly, the yellow and red ribbon going downward might make the casual reader think that somehow low inflation is a bad thing. Of course, that’s idiotic … but like I said, this is a victory of artistry over understanding. Anyway, what we want is for wage growth to exceed inflation. So these two panels tell us that 2015 was a pretty good year. This is what we would have liked to have seen over the last several years, and that was a reason why people felt so lousy about the recovery back then. Unfortunately, there’s more bad editing here, so some of the years are mislabeled, and it’s hard to tell which ones were comparable to this past one.

This is drawn from an article entitled “Hurdles Persist Despite Job Gains” that appeared in the January 9 issue of The Wall Street Journal.

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